Professional Liability vs. Errors and Omissions Insurance: What’s the Difference?

It doesn’t matter how good you are at what you do – everyone can make a mistake. Mistakes are a natural part of any profession. However, if you offer professional services, and your clients feel like your mistake caused them damages or harmed them in any way – they may decide to sue you. This is where professional liability insurance, or errors and omissions insurance, comes in to protect your business.

Here’s an example to illustrate how crucial it is for a business to have coverage. In September 2020, the ABA released a study that analyzed legal malpractice claims trends from 2015 to 2019. They found that the percentage of claims resulting in large payouts of more than $2 million increased substantially.

What can confuse many business owners and professionals looking for insurance that covers professional mistakes or negligence is the sometimes inconsistent terminology used by insurers.

However, this shouldn’t concern you. Even if you’re unsure what all of these names mean, the naming conventions are actually simple and fairly interchangeable. In the end, the name of the policy isn’t important – what matters is what it will protect you from and how much insurance you should buy. Let’s break down the difference between professional liability and errors and omissions insurance:

Professional Liability Vs. Errors and Omissions Insurance: Is There a Difference?

The basic premise is that these insurance policies protect you from lawsuits caused by dissatisfied clients. The main difference comes from how the terms are used in the insurance industry. The language insurers use to call these policies differs by the industry they protect.

In most cases, the terms “E&O insurance” and “professional liability insurance” can be used interchangeably. Sometimes, the naming convention “malpractice insurance” is used – largely in the industries where the corresponding language is used in the claims.

Let’s break down what naming conventions are used in which industry:

Professional liability insurance: Used mainly for architects, accountants, and professional consultants. If your offer can be considered “a professional service” and doesn’t fall under the malpractice wording, you’ll most likely see this terminology.
E&O insurance: Startups, tech companies, real estate companies may more often encounter this wording.
Malpractice insurance: Used almost exclusively in the medical and legal fields.

Do You Need Professional Liability Insurance, and How Much Does It Cost?

There’s a simple way to know if you need professional liability insurance. Answering the following three questions will help your decision:

Do you or your employees offer professional services? If you do, can an error or unforeseen event cause them financial or reputational damage?
Do you provide professional advice that could lead to claims of professional negligence?
Do clients share sensitive information with you?

If you answered “yes” to one or all of these questions, you need to consider a professional liability policy.

Now let’s discuss how much you’ll have to pay to be properly protected. This is a complex question. It can be difficult to talk numbers without sitting with an expert or providing detailed information about your business. However, we can discuss what factors will influence the cost of E&O insurance and what you can do to get adequate protection at the best rates. Let’s break down the factors that will affect your premium:

Industry

The first and foremost consideration for insurers is your premium. They will assess your industry within the context of two factors: how much damage a mistake can cause a client and how often errors occur on average.

They will want to know how much they’ll have to pay if you’re sued and how often that can happen. Certain professionals will inherently carry more risk than others. For instance, lawyers will have to pay more than web designers because they face a significantly higher risk of being sued for massive amounts of money.

Location

The location of your business will significantly influence your premium. Companies based in large urban areas can expect to pay more than those in smaller towns. Also, some U.S. states will require a specific amount of coverage for some industries. Businesses operating in these states can expect their premiums to be higher.

For instance, Oregon mandates that all legal practitioners must purchase professional liability insurance. Most other states will require lawyers to let their clients know whether or not they have a professional policy in place.

The Requested Limits

The higher the limit you request, the more you’ll have to pay for insurance. When considering how much E&O insurance to get, it’s crucial to understand the potential professional risks that face your business. If you want to discuss how much E&O coverage is enough, you can reach out to one of our brokers.

Size

Companies that employ a higher number of employees and have a higher revenue can expect to pay a higher premium. The more employees you hire, the greater your chance of one of them making a mistake. Similarly, the more money you make, the larger the lawsuits against your company.

How Long You’ve Been Operating

Insurers will consider businesses that have been operating for a long time as less risky. Experienced professionals will pay less for E&O insurance.

Claims History

If you have any prior or outstanding claims, you’ll have to pay considerably more for insurance. Insurers will view your previous experience as an indicator of future performance. The more claims your business reports, the higher your premium will be. Before getting coverage, you’ll have to disclose any lawsuits or potential disputes.

Feel free to sign up to Embroker’s digital platform and get your professional liability insurance quote in 20 minutes.